Bye-Bye Nasdaq Rally, For Now: Market Recon

We all know that the Nasdaq Composite has run 22% year to date; however, the hard-charging, tech-laden index has slowed its trajectory of late. Up top, we spoke of the 9% run of the Dow Industrials over the past three months, as well as the 4.3% performance turned in by the small-cap index. The Nasdaq over that time? Less than 3%.

We've heard a lot lately on the rotation out of FANG. Should you be out of those stocks? With the exception of Alphabet (GOOGL) , where I stayed long, and Netflix (NFLX) , where I just jumped back in small, I have avoided these names myself for more than a month. Maybe I'm biased. Everyone knows that I am a Walmart (WMT) fan. What do I think of the Nasdaq going forward? The chart below is very busy. It needs to be. Print it out, and we'll discuss.

First off, keep in mind that tech is the horse that I rode in on, and I remain long an absolute bevy of semiconductor-type names. I think that group will ultimately prove to be the long-term support for this index when it gets heavy.

Doing the Twist

This chart begins with last year's election. I could have started it earlier. Heck, I could have started it almost 10 years earlier, but that was a major selloff that did appear to bow the trend somewhat, and let's face it, the fundamental environment did change at that point.

The Pitchfork model clearly shows that a certain level of support did crack this summer. The lower tine is now support, while the central tine, formerly support, has become resistance. This suggests to me that on a "sell the news" event regarding tax reform, profit taking could easily take the index below current support. Should that spot crack, the crowd looking for a 38.2% Fibonacci retracement would be watching for much lower levels, barely above 6000 on the index. Too far? There is a 330-point gap between the 50-day and 200-day simple moving averages (SMAs).

Would I abandon my longs based on this obvious danger to the index? No; 10-year trends that hurdle changing fundamentals with only minor bends do not die that easily. Though there could be a "sell the news"-type event, the index is likely to regain its footing in the event of any shakeout. As we have often seen, the "buy-the-dip" crowd tends to show up. Tighter monetary policy does become a headwind, I believe, as the yield on the 10-year approached 3%. My thought is that the index could hit resistance around 6800, and if that level can be held, 7100 would then become a reachable target over a six-month timeframe.

The indicators for the short-term are mixed. The Chaikin Money Flow is still flying the flag of strong institutional investment. However, both Relative Strength and the Full Stochastic Oscillator indicate that the index is now coming out of an overbought condition. The moving average convergence divergence (MACD), which is one of my very favorite tools, shows a bearish crossover, though at elevated levels.

What Am I Trying to Tell You?

Simply put, I am trying to indicate that short-term, the index will continue to struggle somewhat. Do you want to be long this index, or its components? Yes, I think the prudent investor would be crazy to abandon such a consistent performance. That said, if you're out, I think there is a better point of entry ahead. If you're long, there will be a better spot to add. If you're short, you are going to get your chance. If you are the kind that checks your portfolio once in a while, and does not actively manage your book, you can go back to the box scores. I think you'll be fine. That's not a promise.

(This is an excerpt from Stephen "Sarge" Guilfoyle's Morning Recon, which now appears exclusively on Real Money, our premium site for active traders. Click here for a free 14-day trial and receive Morning Recon every day, along with exclusive columns from Jim Cramer, James "RevShark" DePorre, technical analyst Bruce Kamich and more.)

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